What Is An HMO Mortgage?
HMO Mortgages are loans used to purchase a HMO, with the property used as security for the debt.
HMO (house in multiple occupation) is a term used by the Government to explain “a property rented out by at least 3 people who are not from one household, but share things like the bathroom and kitchen”.
‘Household’ is a key term here. A household is classed as a property used by couples married/living together, families or relatives. These do not fall under HMO rules.
Another term often used to describe a HMO property is a ‘house share’. This could be students renting one property or workers sharing a property. An example of this could be a 4-bed house, each bedroom has its own door lock and is let to a single tenant. The individual letting rooms are not self-contained meaning they all share a kitchen and bathroom, unlike a flat. Typical HMO’s could include:
- Shared housing
- Privately run halls of residence
- Employee housing
If you require more information call ABC Finance Limited today.
What Is A Large HMO Property?
A property is thought to be a large HMO if it’s 3 or more storeys high and has 5 or more tenants forming more than one household. If buying a large HMO property, you will need to look at more specialist HMO mortgages.
Some specialist HMO mortgage lenders do not put a limit on the number of bedrooms allowed, they will simply take a view on the application as a whole. They will mainly look at the client’s experience in letting HMO property, the property itself, location and the rental value.
Is There A Difference Between Buy To Let And HMOs?
A buy to let or single let property is for example, a house let to a single family unit. An HMO property however, is let to multiple (3 or more) tenants, such as student lets. This will require a HMO buy to let mortgage.
There are advantages and disadvantages of both, e.g. a single buy to let is simpler to manage but if the tenant moves out, there could be a rental void. As an HMO has several tenants this void is less likely.
Landlords are attracted to HMOs as they often offer greater rental yields and subject to a strong location, it can be easier to find tenants. Students, companies and housing associations are all good examples of likely tenants for HMOs. Tenants are attracted to HMOs as they can be far more affordable. They are popular in high value rental areas as the cost is shared by more paying residents.
Take the example of a HMO property used to house temporary workers (e.g. contractors). It’s highly likely that good rents will be received and there will be a steady stream of tenants. Even better, the company may pay the rent regardless of whether they have put a worker in there. This saves you the hassle of having to find new tenants every time one moves out.
As the structure of the tenancies differs from that of a simple buy to let, HMO mortgages can be a little more complex to arrange. An experienced HMO mortgage broker should make the process hassle free.
Why Is An HMO More Profitable Than A Single Buy To Let?
A buy to let rental yield tends to be lower than a HMO rental yield. Rents differ because the rent of a simple buy to let is charged monthly based on the property value. An HMO landlord usually charges per room, per week.
A four-bed house could achieve say £700 rent per month as a single buy to let but could bring in say £70 per room per week as an HMO. This would equal a monthly rent of £1,213 per month.
Although HMO mortgages can be slightly more expensive, this is countered by the higher rental yield. To maximise this profit, enquire now and as a whole of market HMO mortgage broker, we will send you an illustration offering the best HMO finance rates available to you.
Is An HMO Licence Required?
Any property deemed as a Large HMO will need to have a valid HMO Licence in place. According to the Government website, an HMO is considered to be large if all 3 of the following apply:
- It is let to 5 or more separate tenants forming more than 1 household.
- It is 3 or more storeys high.
- And, tenants all share a bathroom, kitchen and toilet.
Different councils may have different rules regarding licencing therefore even if your property does not fall into the above description, it is worth contacting the local council to find out.
You must have a separate HMO licence for each HMO Property you run. An HMO licence usually lasts for 5 years and must be renewed before it runs out.
When applying for an HMO licence, the council will want to make sure:
- You or your letting agent are deemed to be ‘fit and proper’ with no criminal convictions or breaches of the landlord code of practice etc.
- The property is suitable in size and facilities are adequate for the number of tenants.
The council will also require:
- That you send them an up-to-date gas safety certificate every year.
- Have adequate, maintained smoke alarms fitted.
- Provide them with safety certificates for electrical appliances.
When applying for HMO mortgages, the lender may want a copy of any licences. If your HMO property does need a licence you can apply for one on the governments’ ‘gov.uk’ website.
Can I Convert A Property Into An HMO?
Yes is the simple answer, subject to planning permission, but not all lenders will allow this. We have access to HMO finance conversion products which are ideal for this, regardless of the level of work involved. The interest rate will be higher whilst the work is carried out but a lower rate will be available when the work is complete.
In some cases, ABC Finance Limited can arrange a property refurbishment loan whilst having the long-term mortgage pre-approved and ready to complete. In these circumstances, you are able to move to the cheaper long-term loan as soon as the work is complete.
Is Planning Permission Required?
This depends on the location and also the property itself, it’s worth checking with the relevant council. A House in Multiple Occupation will mostly hold C4 usage. An HMO property, whether licenced or not, will fall into this group.
The General Permitted Development order streamlines the process by allowing change of use from C3 (residential) to C4 (HMO) without planning consent being needed. This is a major benefit to smaller HMOs.
A Sui Generis HMO property is a term used to describe a larger HMO property that doesn’t fall under C4 usage. A Sui Generis HMO may need planning permission, but this will be on a case by case basis. C3 to Sui Generis will likely need planning permission, however, C4 to Sui Generis may not.
This can become quite complex therefore if you are unsure about HMO planning consent, please feel free to contact us and we will be happy to help.
Securing The Right HMO Mortgage For You
Managing an HMO is more complex than a standard buy to let. HMO mortgage lenders criteria tend to vary hugely and as such, finding the best lender for you can become difficult.
The decision between using a reputable HMO mortgage broker or going directly to lenders is an important one. By having an initial chat with us, you will receive a whole of market view and get free impartial advice. This will give you a good idea of the likely rates you would be able to achieve based on your situation.
Applying for HMO mortgages doesn’t have to be difficult. Although searching the market can be tough, working closely with ABC Finance Limited can make the process far simpler. As your portfolio evolves, the right lenders for you will also change. Building a relationship with a trusted advisor can save a lot of time in the long run.
To speak to an unbiased advisor and receive a free quote tailored to you, enquire online now or call ABC Finance Limited on 01922 620008.